Why continue to contribute to my 401k?

[alexxa252001]

Good morning, all!

First I want to mention what a great forum this is. I am a reader for quite some time now and this is my first post

Of course, I have a questions right away: I am working in HR and see a lot of our employees stopping their 401k contributions and/or decreasing their contributions. The company just recently had to cancel the 401k match, so employees think "if the company doesn't match anymore, what's the point in me investing in my 401k?" --> of course, totally wrong thinking!!!

We have a lot of young employees who don't think about retirement yet or just rely on Social Security. I am trying to draft up a letter to our employees that addresses this issue and why it is especially NOW so important to contribute into your 401k (buy low, more than 20 years to retire, etc...). Do you have more arguments that I can tell our employees. I really do want this letter to be an eye-opener for them.

Thanks for your help!

[red92s]

If my company eliminated matching, I'd stop my 401(k) investments also.

They'd be going to a Roth IRA instead (until it was maxed out).

[disneysteve]

The company just recently had to cancel the 401k match, so employees think "if the company doesn't match anymore, what's the point in me investing in my 401k?" --> of course, totally wrong thinking!!!

We have a lot of young employees who don't think about retirement yet or just rely on Social Security.

Anybody of any age, and especially younger folks, who are counting on SS to finance their retirement are going to be in sad shape.

That said, if the 401k is not matching, workers should probably max a Roth first and then contribute to a 401k once the $5,000 is in the Roth for the year.

[disneysteve]

Assuming the employee is maxing a Roth, though, the 401k should certainly be next in line for retirement savings. After tax-free growth (Roth), tax-deferred growth (401k) is the next best thing.

I'd suggest looking up the stock market return over the past 20, 30 and 40 years. Use an online calculator to show how a steady investment in a balanced portfolio might grow over the next 20, 30 or 40 years.

[Broken Arrow]

Yeah, if my employer stopped matching, I would stop contributing to my 401(k) as well, and fund my own IRA instead.

That said, it is a problem if people are not saving at all for their retirement.

Welcome to the board by the way. Glad you like it.

[boosami]

I took the opposite approach... I fully funded my 401(k) before fully funding my Traditional IRA. Why do you guys prefer to fund an IRA before 401(k)? Is it just because the 401(k) is employer-tied, or are there other reasons?

[Broken Arrow]

Basically, 401(k) investment choices tend to be more limited than IRAs.

Also, 401(k) is controlled by your employer whereas IRAs are controlled by you.

So, if there is no employer match, there's not really any incentive why I would want to pick 401(k) over my own IRA.

Again, that's a basic generalization. There are exceptions....

[Scanner]

Also, 401(k)'s, a lot of them, are involved in loaded or high expense mutual funds, not to mention administrative costs (gotta pay HR employees, right? )

A Roth let's you pick your own investment vehicle.

[Broken Arrow]

Also, 401(k)'s, a lot of them, are involved in loaded or high expense mutual funds....

Yes! My old 401(k)'s funds all had 5.75% front load, except for international funds, which was higher but don't remember what. The expense ratio was around 1.5%.

My current 401(k) is great though. It's Fidelity, and the funds available had no front loads and typically around 0.8% in expense ratio.

Of course, if there is no employer matching, I can still buy the same fund for the same price through an IRA as well....

[MonkeyMama]

Well, remind them that their taxable income is reduced by their 401k contributions. There is an incentive!

This is a reason I would put money in a 401k regardless of match. You can roll it into an IRA when you switch employment anyway. How long does anyone stay at one job any more? Every dollar I did ever put in a 401k is sitting in my ROTH IRA today.

[kork13]

Well, remind them that their taxable income is reduced by their 401k contributions. There is an incentive!

This is a reason I would put money in a 401k regardless of match.

Totally agree with this. In the military, we don't get any sort of match for our TSP (401k-equivalent) contributions. However, I'm using my contributions to the TSP as a way to keep my taxable income under the line for the 25% income tax bracket. As my pay goes up over the next few years, I'll contribute progressively more to try to stay in the lower bracket as long as I can. Saving more can only help me in the end....

On the other side-topic, I love the TSP's fund options--5 funds, all based on a few major indexes. The expense ratios are all about .019% (ridiculously low), which is another reason I would choose a 401k (or TSP in my case) -- If the funds available have very low expenses, it would be worth using the 401k, even without a match. My tax-free (Roth) funds average around .9% expenses. My tax-deferred (TSP) funds are only .019%. Benefit? Heck yea, I'm saving nearly 1% in annual fund expenses!

OP, one other thing I would mention -- using the company 401k can be an EASY way to save for retirement. With the 401k, you don't have to go through the trouble of choosing an investment firm, analyzing scores of nearly identical mutual funds, and working out a way to fund those investments. A 401k has fewer options to deal with, and most HR departments have made the process of signing up for a 401k quite easy. Especially if you have target-date funds available, you can literally "set it and forget it" and let your retirement savings build up with automatic paycheck deductions.

[arthurb999]

Roth and more control...